The AFP modernization trust fund: Creation, operation and investment policy

• Main Author: Acedera, Arnulfo G.
• Format: text
• Language: English
• Published: Animo Repository 1998
• Subjects: Investments > Mathematical models; Mutual funds; Capital assets pricing model; Funds-flow statements; Portfolio and Security Analysis
• Online Access: https://animorepository.dlsu.edu.ph/etd_doctoral/779
• Institution: De La Salle University

Enacted into law in 1995, the AFP Modernization Act (RA 7898) seeks to modernize the AFP to a level that it can effectively and fully ... uphold the sovereignty and preserve the patrimony of the Philippines. Subsequently, the Act was operationalized and the development phases outlined for an effective and responsive defense system in 15 years.The program entails a funding of P331.62 billion. Due to budget constraints, the program is divided into two phases: a priority Sub-program I of P164.553 billion to be funded through appropriations from Congress and a Sub-program II of P167.067 billion which will be funded from the proceeds of a modernization trust fund and sources other than government appropriations. Section 11 of RA 7898 specifically identifies these sources of funding to be administered through the AFP Modernization Trust Fund.For the first five years, an initial amount of P50 billion, of the total P16.553 billion of Sub-program 1, is appropriated. The balance is to be released within the 15-year period, specifically P50 billion on the fifth year and P64.6 billion on the tenth year.This study aims to derive a rational method to manage optimally the Trust Fund to ensure full financing of Sub-program II. Upon evaluating the financial flows of the Program, a financial quantitative model is created to show mathematically the relationship between sources and uses of funds that would be needed to implement the program. This quantitative model then becomes the basis for the formulation of an efficient frontier of portfolios using the Markowitz optimization methodology. With the Markowitz model, five efficient investment portfolio mixes are evaluated to determine its appropriateness, as far as the Fund's objectives and constraints are concerned. For each portfolio mix, the expected return is illustrated by a chart. In the choice of the optimal portfolio mix, it is not sufficient to select merely the portfolio which provides the highest expected return. It is inevitable that returns vary over time, within the range defined by teh portfolio risk level. Thus, particular emphasis must be given to the Sharpe ratio. A portfolio mix with a slightly lower expected return but with a higher Sharpe ratio, compared to that of the other portfolio mixes, may prove to be a wiser choice in the long run. Finally, these optimized portfolio mixes are applied to the set of contributions and disbursements under the AFP Modernization Program. Three funding alternatives are considered as far as the incoming contribution amounts and their timing are concerned. Alternative 1 refers to the approved government appropriations. Alternative II includes, in addition, the proceeds from the sale of Phase I of Fort Bonifacio. Alternative III includes the proceeds from the sale of both Phases I and II of this real estate property. The results of the various simulations show that there would be sufficient funds to finance the AFP Modernization Program.Thus, the trust fund is not only important but is especially crucial to the complete implementation of the Modernization Program. Based on an urgent need for a credible defense capability, it is recommended that the AFP Modernization Trust Fund be created.